Therefore, if Delta airlines had used Singapore airlines’ depreciation policy then Delta airlines’ depreciation expenses would have been $486.68M, which is $140.68M more than what was reported using their own policy. Impact of Singapore Airlines’ Depreciation Assumptions Although Singapore airlines’ depreciation expense results in reduced Net Income, it is able to accomplish several goals. As the aircraft are only around 5 years old, Singapore can sell the “pre-owned” aircraft at a higher price than an older craft. Selling off the aircrafts at such a young age allows Singapore to recoup a significant portion of its initial purchase expense.
Although not identical in process, leasing these aircraft could have a similar financial effect. Instead of incurring the full cost of the airliner, Singapore’s revenue from selling the aircraft in such good condition helps defray the initial cost. This sale revenue helps offset the cost of the new aircraft coming into the fleet. By being able to purchase new aircraft on a more frequent basis, Singapore airlines can offer its passengers newer, more high-tech aircrafts.
Consumers are willing to pay more for better, faster planes, especially business travelers who depend on the speed and comfort of the aircraft to endure the long hours of travel. This is evidenced in Singapore Airline’s 2003 Annual report.1 Over the course of 12 months (April 2003 to March 2004) Singapore Airlines received over 100 service awards including Fortune Magazine’s World’s Most Admired Companies 2004 All Star list (ranked 2 of 32), and Reader’s Best Brands Awards 2003 Best Foreign Airline for the 10th consecutive year.
In 2003 and 2004, Singapore Airlines has sold or disposed of 15 airliners and purchased. These sales and disposals resulted in $1.5 Billion (USD) cash inflow. Purchases of new airliners resulted in $2.2 Billion (USD). The difference of only $700 Million (USD) was the only real cost incurred by these purchases. Some of the aircrafts sold were bought by leasing firms who leased-back the younger aircraft to the airline company. Singapore also phased out their Airbus 340’s, after seven years of service.
Singapore airline’s overall strategy is performance and excellence – to maintain a high standard of service, both in its employees as well as in aircraft and equipment. By maintaining such a short life span for its aircraft, Singapore can offer its passengers some of the most high-tech conveniences of air travel. Many airlines that use older aircraft do not have the latest and greatest in passenger technologies, such as new larger television screens, more ergonomic seating and more legroom. Singapore may also be able to avoid some of the more expensive maintenance procedures that may plague airlines that keep older aircraft. It also does not have to worry as much about safety compliance as the aircrafts rarely have a chance to fall into that level of despair.
Impact on the amount of depreciation expense Let us consider that both Delta airlines and Singapore airlines own $100 Million worth of aircrafts.
In this case, the depreciation expense per annum of the Singapore airlines will be about 1.6842 times that of Delta airlines. Due to rapid shorter aging period, Singapore airlines have to renew their fleet at a rapid interval compare to Delta airlines. In addition, over the time, Delta airlines had accumulated flight equipment that is older than that of Singapore airlines. The assets are accounted based of their cost of acquisition, which will presumably be less than their present valuation and cost of new equipment. Therefore, the depreciation expenses (computed as a percentage of asset whose value is assessed using its acquisition cost) for Delta airlines will be very less than that of Singapore airlines (which contain newer flight equipment whose cost of acquisition will be relatively high).
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